Rethinking the ‘Gold Standard’ of Today

Some days you wake up and there’s just so much news you can’t process it all. That’s how it felt this morning at Gold Enthusiast HQ. As is so often the case, shuffling off to the coffee machine and coming back proved to be the answer. The mind, now 1% more awake, realized a lot of the news was the same stuff coming from different directions. Aaah, that’s better; the world is making (some) sense again.

One topic your friendly Gold Enthusiast has avoided for a while is the gold standard. It’s the idea that a currency should be directly tied to a physical asset – something “real” in other words. Under modern monetary theory This idea is relegated to the scrap heap of history. After all, governments control currencies, and we all know we can trust governments to do the right and the best thing for their citizenry at all times – doesn’t history prove this out?

Pardon me while I try to stop laughing.

Yes, history does show that citizens should definitely NOT trust their governments. There isn’t a first- or second-world government around today that hasn’t been severely reformed in the last 500 years. Nowadays most governments are lucky to make 300 years. Even the Brits had to give up colonialism, and their habit of randomly tossing out the Prime Minister and restating the powers of the Commons arguably amounts to a series of bloodless coups.

Even the mighty US, currently approaching 250 whether you use 1776 or 1782 as your starting point, seems to be teetering of its own weight. Or the weight of the influx of millions of non-citizens, depending on how you look at it. Strangely, much of the internal impetus to topple the US seems to be coming from citizens who’ve gained the most from it – but this isn’t a political column, so we’ll leave that meaty topic to historians and social media.

Back to the gold standard. Your friendly Gold Enthusiast is partly in favor of the idea. “Partly” in this case means that a currency should be managed first and foremost for the benefit of the ALL the country’s citizens. Not just the economists or top 1%. In theory this may be possible without tying the currency to a core asset, such as gold. All it would take would be reasonable restraint on deficit spending and wage inflation.

Yet restraint in spending doesn’t seem to bring in popularity, votes, or political power. And that’s what elected officials need to remain elected. Without votes their titles change to Tossed Out Senator, or Former Governor. None of which carries a noticeable amount of clout on Capitol Hill.

The other problem, which wasn’t a problem until inflation was invented, (haha that’s supposed to be a joke,) is the vast amount of gold (for example) which would be required to back up a gold-standard currency. The sheer volume of money sloshing around the world economy today is incredibly vast. So too would the pile of gold (let’s say) it would take to stand behind each dollar. We haven’t tried to do the calculation, but we suspect it’s like the practical result of space-time expansion: At some point, the thing grows so quickly that it becomes physically impossible to keep up with it. In other words, there would be a calculable point where the amount of new gold needed to backstop new currency would be greater than the total amount of new gold produced. That’s a problem the Gold Enthusiast has never seen discussed, yet seems as likely as the sun rising in the morning.

So something like a gold standard does seem to be needed, if for nothing else but to restrain the government from treating their currency-creating powers like an endless supply of wealth. There’s a huge difference between money and wealth – even if economists (or those with economics degrees) fail to accept the practical gravitas of confusing the two concepts.

How to do it well is the problem…

Let’s leave mind-bending behind because your Gold Enthusiast’s brain still feels like it’s Monday. Fortunately for us there are others thinking about strong currency, gold standards, and related concepts – and they share their work for free. A huge shout-out and point-at to Nathan Lewis, writing this time for Bullion Vault, for his published article today titled Austrian Steps To A Gold Standard, which explores other aspects of “going gold.” It’s well worth the read, and a good ponder over.

There’s one other really nice piece of work that got published yesterday, but we’ll leave that for another day. Keep your thinking cap on, and tell us what you think about the gold standard in the Comments below.

Signed,

The Gold Enthusiast

DISCLAIMER: No specific securities were mentioned in this article. The author has small long-gold holdings in NUGT, JNUG and a few junior miners. He is not expecting to trade any of these in the next 48 hours.

About the Author: Mike Hammer

For 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading GroupMore...